AAII Sentiment Survey: Bullish Sentiment Rises To A 6-Week High

Bullish sentiment, expectations that stock prices will rise over the next six months, jumped 6.6 percentage points to 34.0% in the latest AAII Sentiment Survey. This is the highest level of optimism since May 3, 2012. Nonetheless, bullish sentiment is below its historical average of 39% for the 11th consecutive week.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, rose 3.4 percentage points to 30.2%. Even with the improvement, neutral sentiment stayed below its historical average for the fifth consecutive week.

Bearish sentiment, expectations that stock prices will fall over the next six months, plunged 10.0 percentage points to 35.8%. This is the largest one-week drop in pessimism since Jan. 5, 2012. Even with the plunge, bearish sentiment is above its historical average of 30% for the ninth time out of the past 10 weeks.

The recent rebound in stock prices helped to calm the nerves of some investors, but many remain fearful that further declines could come. Worries that the European sovereign debt crisis and a slower pace of U.S. economic growth will lead to a repeat of last summer's correction are keeping pessimism at above-average levels. As we noted last week, nearly half of surveyed AAII members said they were taking on less risk than they were six months ago.

This week's special question asked AAII members if they thought stock valuations are now attractive from a long-term standpoint. Approximately two-thirds of respondents said, yes, they are. The primary reasons given were strong balance sheets and low price/earnings ratios. Close to a third of respondents said, no, valuations are not attractive. These members cited sovereign debt problems and expectations that stock prices will fall further.

Here is a sampling of the responses:

"Valuations are attractive. Productivity and profits continue to rise."

"Yes, due to low multiples and strong corporate balance sheets."

"Yes. The large corporations have good balance sheets, and price/earnings ratios are attractive."

"No, profit margins are near all-time highs. I believe they will revert closer to the mean in the years ahead."

"No, the market will fall further before the election and Europe are settled."

This week's AAII Sentiment Survey results:

Bullish: 34.0%, up 6.6 percentage points

Neutral: 30.2%, up 3.4 percentage points

Bearish: 35.8%, down 10.0 percentage points

Historical averages:

Bullish: 39%

Neutral: 31%

Bearish: 30%

The AAII Sentiment Survey has been conducted weekly since July 1987 and asks AAII members whether they think stock prices will rise, remain essentially flat, or fall over the next six months. The survey period runs from Thursday (12:01 a.m.) to Wednesday (11:59 p.m.) The survey and its results are available online here.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.